FDIC suits against failed financial institutions seeing a spike

The failures of the financial crisis are now starting to be felt in court rooms, as the Federal Deposit Insurance Corporation (FDIC) has reported that director and officer (D&O) litigation against failed financial institutions spiked in 2013 following multiple 2009 and 2010 bank failures.

A report from Cornerstone Research indicates that nearly 40 percent of the 297 financial institutions that failed in 2009 or 2010 have been subject to FDIC litigation or have settled with the FDIC prior to a lawsuit.

That number should rise even higher in early 2014 after a miniature lull in the fourth quarter of 2013. According to governmental regulations, the FDIC must file a D&O lawsuit within three to four years of a financial institution failing. That means the rest of those failed institutions from 2009 and 2010 will soon be seeing their day in court.

“While FDIC filings of new D&O lawsuits hit a lull in the fourth quarter of 2013, new filings are unlikely to continue at such a slow pace in the first half of 2014,” said Katie Galley, a senior vice president at Cornerstone Research, to theWall Street Journal. “Three lawsuits were already filed in January, and as motions and discovery unfold in existing lawsuits, this year will be interesting to follow.”

These lawsuits should further place pressure on U.S. banks that have to cover rising legal costs. The total tab from the financial crisis reached $100 billion for U.S. banks last August.

Banks need to cope with changing FDIC strategies as well. As InsideCounsel noted in July 2013, the fact that all FDIC settlements are made public puts pressure on the agency to take a hard line with offenders. More often, the FDIC has preferred litigation to settlements, especially when it comes to directors and officers.

California-based IndyMac learned this lesson the hard way when, in December 2012, the FDIC suit resulted in a jury returning a $169 million verdict against three officers that had approved risky loans.

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